Bitcoin: Problems already cloud the currency's future

Bitcoin is booming. But many researchers close to the world's most feted cryptocurrency are expressing concern about the security of its assets, and the stability of the economy that has grown up around it.

Jonathan Levin at the University of Oxford runs Coinometrics.com, a website dedicated to capturing a statistical picture of Bitcoin as a working economy. Since the record of all Bitcoin transactions is public, Levin has used it to gather data about the distribution and movement of bitcoins.

His research has shown that 35 per cent of currently existing bitcoins – worth roughly $3.5 billion at today's exchange rate – has not been touched for at least a year. "There are addresses with up to 120,000 bitcoins that have been sitting there for three years," he says.

Levin is concerned that if the owners of those large, idle hoards suddenly started making lots of transactions or cashing in, it could lead to a lack of confidence in the Bitcoin economy.

Market monopoly

The alliances that form to mine new bitcoins present their own problems. A mining pool known as Ghash.io, which allows people with bitcoin-mining computers to aggregate their resources and share payouts, recently gained more than 40 per cent of the total computational power – or "hash share" – of the Bitcoin network.

This is unprecedented. Any group with a hash share of 51 per cent could potentially manipulate the way the entire Bitcoin ecosystem functions. Ghash issued a press release claiming they had no such ambitions, but Vili Lehdonvirta, an economic sociologist at the Oxford Internet Institute, UK, says the development is deeply problematic. "Bitcoin is supposed to be a currency and a protocol where I don't have to trust anyone," Lehdonvirta says. "But now suddenly I'm in a situation where I have to trust a large mining-pool operator who says, 'Don't worry, we're not going to do anything bad'."

Matt Corallo, a software developer who works on the Bitcoin protocol, admits this shouldn't be the case. "Ultimately, you shouldn't have to trust Ghash, but I think we do right now," he says. However, he adds that any exploitative activity by the Ghash group could cause it to dissolve, as members can easily choose to leave, cutting Ghash's hash share as they go.

The people who buy, sell and mine bitcoins are also constantly required to place trust in services that complement the workings of the Bitcoin protocol. Unfortunately, such trust has been shaken in recent months thanks to trading scams, hacking and the collapse of exchanges and e-wallets which are used by many for the storage of Bitcoin addresses.

Totally owned

Adam Kujawa, an analyst at high-tech security firm Malwarebytes, points to the recent hacking of online wallet service Inputs.io. Apparently, an attacker managed to take control of the email address of the Inputs.io administrator, gain access to the site's database and transfer out $1.2 million of other people's bitcoins.

"It wasn't about getting through a vault," Kujawa says. "You'd think a digital wallet would in some ways be more secure, but it wasn't, it was just loaded on a server. It was really just a matter of 'owning' a system, as we say, hacking and taking it over, the same as you would if you were trying to steal someone's digital pictures."

Once an attacker gets access to a list of Bitcoin addresses, which allow users to receive Bitcoins, it's relatively easy to transfer the assets associated with those addresses to another location. A fundamental feature of Bitcoin is that transactions are non-reversible, and because the e-wallet and exchange industry is largely unregulated, there are often no guarantees if a breach occurs. The money is simply gone.

The potential reasons behind exchange closures varied from buckling under high trade volumes to failing to cope with regulatory pressures, which are stricter in some countries than others.

Corallo says he wouldn't recommend that anyone store their bitcoins in an online exchange or wallet, but acknowledges that many presently do. "People are used to trusting their financial institutions," he says.

Despite the concerns, Corallo stresses that developers like himself, at the heart of Bitcoin, are dedicated to getting it right.

"The people who are core developers have been here for three or four years at least and we're all very well aware of the complexities," he says. "These are the things we've been thinking about very critically for many years."

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Some caches of bitcoins haven't been touched for years (Image: Image Source/Getty)